Daily analysis 31.07.2014

EUR/USD stays below 1.3400. Good GDP reading from over the ocean and mixed signals from Fed should not be an argument leading to relieve latest dollar highs. Inflation from the Euro Zone. The zloty weakens slowly, exceeding 4.16 per Euro and testing 3.11 on the dollar.

The data. Euro Zone. Friday

The Thursday session brought yet another dollar strengthening and fall of the EUR/USD under 1.3370. Good GDP reading from over the ocean was the most positive element for the American currency. However, due to a bit worse ADP reading and mixed Fed comments, quicker greenback appreciation did not happen.

The data about the economic growth, published by the Department of Commerce from over the ocean was a positive surprise. After very weak first three month of 2014, when the American GDP shrinked by 2.1% q/q after its revision (it was estimated that the fall was as big as 2.9%), Q2 brought clear set off and growth at the level of +4.0% q/q. As the economists assumed the growth about +3% q/q and such strong a revision of the previous reading, the data turned out to be positive for the USD, due to the argument for earlier interest rates raise and higher inflation pressure. The GDP components show that the growth relatively good and generated by the private sector (regarding both investments and consumption) and the government expenses are still reduced

In case of the American reading it is worth paying attention for the methodology, especially when changes as high as 6 parentage points from quarter to quarter are observed (from -2% to +4%). The Department of Commerce publishes its readings quarter to quarter which is annualized. Despite the fact that the data is seasonally adjusted (due to the economic activity related to the seasons of the year), the annualization of the reading (assuming the annual data to be the multiplicity of data from the current quarter) caused quite rapid and unpr oportional changes. Hence if the first three months of the year brought very severe winter, which caused the seasonal adjustment to be insufficient and the reading we got was -0.5% quarter to quarter. Back then the seasonal adjustment caused -2% to appear at the headlines. It is much better to use the figures above in the context of data year to year (that is, a comparison between the current quarter and the one from the year before, used among others in Poland). According to this methodology, the GDP from over the ocean raised in Q1 by 1.5% y/y (after latest revision by 1.9% y/y) and by 2.4% y/y in the second one, what shows much smaller fluctuations and prevents from drawing hasty conclusions.

Yesterday Fed communicate was quite mixed. The Federal Reserve has noticed that the situation on the labor market improved and the unemployment rate fell (hawkish) and simultaneously other "indicators describing employment (probably the participation rate, that is the number of people working part-time and low wages raise) show that labor resources are largely unused (dovish)". As for the inflation, the communicate changed a bit and currently FOMC claims that "it got close to the long-term goal of the Committee" (hawkish). None of the FOMC members signed under the communicate - Charles Plosser has not presented the progress of the economy (generally he would have seen sooner raises) claiming that the Fed will have to wait "long after the QE is terminated before interest rate are raised". Interestingly enough, it was expected that Richard Fisher would be against relatively dovish communicate. In the weekend issue of "The Wall Street Journal" he argued for monetary policy tightening. One may conclude that the next meeting will bring two members against the current policy of the doves (also a hawkish signal).

Despite the fact that the majority of the signals from the communicate was hawkish, the dollar supporters might have got scared by the statements about other indicators describing labor resources being significantly unused. This could be a good and easy to use argument (also due to the fact that it is hard to measure and unclear, as opposed to e.g. unemployment rate) to the most important FOMC members (who are dovish) for maintaining relatively benign policy even if the indicators show that the unemployment rate improves. As a result, the FOMC message is to be considered as neutral (probably intended by Fed).

The main currency pair is under pressure not only due to the fact that the dollar strengthens, but also due to the prolonging pressure on the Euro. The July inflation data published by Eurostat show that the prices rose only by 0.4% y/y while the expectations were at the level of 0.5%. It is at the same time the lowest reading for nearly 5 years. The publication excluding food and fuel bring only a bit more optimism. It shows that we have stayed at the level of the publication from last month (+0.8% y/y). The inflation which circles around 0 shows that the ECB will have to prolong the ultra-loose monetary policy and also it gets us closer to introducing the quantitative easing.

Today session on the EUR/USD should be relatively calm (unless jobless claims fall significantly below 300k and the 4-weeks-average also falls below that level) and whether we finish the week under 1.3400 or not depends on the Friday payrolls. The reading above 250k makes us go under to the level of 1.3350 and the weaker data (below 200k) along with quite clear revision downwards of the data from two recent months (30k) might lead to clear correction jump to 1.3450.

Still under pressure

The zloty maintains under pressure due to the situation in the region and falling EUR/USD. However, these are not dramatic changes, rather a gradual value loss. This trend should survive due to the appetite for Polish bonds related only to expectations for the interest rates cut and maintenance of the inflation for a longer period. The perspectives for PLN are moved to the negative side (weaker macro data and sentiments in the region and growing pressure on interest rates cuts).

We can expect a minor rebound on Friday (especially for USD/PLN). If the domestic M=PMI shows improvement in the industry sector and the American payrolls are below 200k, we can expect the week to close below 3.10. Otherwise (PMI falling below 50 points and NFP +250k the Friday readings might lead even to 3.12 on the USD/PLN.

Reassuming, the weakening of the PLN should continue today and we should probably close a bit above 4.16 on EUR/PLN and 3.42 on CHF/PLN. The USD/PLN should also maintain the levels gained in the recent days.

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